City Development - Fully valued

City Dev reported 2Q09 net profit of S$140.0m, 14.7 S cents EPS, ahead of our S$85m estimate. We raise our target price to S$8.37 (S$8.25 previously), accounting for presales at recent launches as well as planned launches in 2H09. Its share price has risen 24% in the past month, and is trading at a 6% premium to our RNAV of S$9.30. Maintain Underperform.

The key variances were higher operating profit from the faster pace of profit recognition of residential projects (S$21m – some profit from The Arte was recognised this quarter), lower finance cost (S$17.3m), as well as lower tax (S$6.6m) and minority interests (S$10.5m). Residential development contributed 60% to earnings, whilst the 15% contribution from rental properties was slightly ahead of hotel earnings contribution, reflecting weak operating conditions. Net gearing was slightly lower at 46% on healthy interest cover of 10.1x. Adjusting for fair value gains on its investment properties, its gearing ratio would fall to ~35%.

Millennium and Copthorne (M&C) reported 2Q09 headline net profit of £16.4m, up from the £9m in 1Q09 reflecting strong cost initiatives in the face of flat hotel revenue. Overall occupancy rate was 67.6% versus 73.3% in 2Q08 with average room rate of £78.40 versus £79.38 over the same period last year. RevPAR as a result slipped 9% YoY to £53. RevPAR in July remains weak at an 18.3% YoY contraction, although signs of improvement are seen in Singapore and New York. We have already factored in a stronger 2H09 in our estimates.

The group plans to launch several projects in 2H09, including Hong Leong Gardens condo (396 units), the former Albany/Thomson Mansion sites (160 units) and possibly The Quayside Isle at Sentosa Cove, suggesting management is more positive than a quarter ago.

FY09 and FY10 EPS raised by 12% and 14%, respectively, updating for 1H09 results and presales at recent launches. We raise our target price to S$8.37, based on unchanged 10% discount to RNAV of S$9.30. The shares are factoring in more than 20% rise in residential prices over the next 12 months. It is fully valued, in our view, as the stock is trading at a 6% premium over our RNAV of S$9.30.

Sponsored Links

CapitaLand - The new-design launch of the former Gillman heights

CapitaLand’s much awaited project launch of The Interlace (former Gillman Heights) in October is expected to receive a warm response and further boost the sales volume in the already buoyant residential segment.

We recently attended the design launch of The Interlace. Located at Alexandra Road/Depot Road, it is one of the largest and much awaited residential developments jointly developed by CapitaLand and Hotel Properties. The design presentation was followed by a media/analysts Q&A session.

Unique architecture. The Interlace has 1,040 units designed by world renowned architect Ole Scheeren, Partner of the Office for Metropolitan Architecture (OMA). The design breaks away from the traditional normal cluster of vertically stacked tower residential apartments into a stacked interlocking hexagonal arrangement comprising 31 apartment blocks with an expansive and interconnected network of communal spaces. The project aims to present a radically new approach to contemporary living in a tropical environment.

Project ASP could set new benchmark levels. The 81,000sqm site was acquired at S$548m or S$363psfppr. Management estimates construction cost at S$250-270psf which works out to a breakeven cost of around S$750psf. We expect average ASP levels of around S$1,000psf, a new benchmark in the area considering the highest resale prices of S$517psf and S$817 psf for Gillman Heights (former site) and Normanton Park (closest comparable) respectively. The average ASPs of some of other comparable projects cited by management in nearby locations are S$900-1100 psf at One North Residences, S$900-1000psf at Rochester, S$800-1,400 psf at Caribbean and S$1,500-1,700psf at Reflections at Keppel Bay.

The sale of the 1,040-unit project could well boost the transaction volumes in the already buoyant mass- and mid-tier segments and set new price levels for future projects. We estimate that the project could bring in S$262.5m in pretax profits or 5.8 cents a share in pretax profits. We expect strong demand for this project considering the attractiveness of the location and recent buying interest.

Project financing completed. The total development cost for the project is around S$1.4b and CapitaLand has made arrangements for a 5-year S$660m project financing from seven leading bankers at an attractive interest rate of 3.48%. Management said construction for the project would begin soon and is close to awarding its construction contract work to local construction and building group.

Ascendas REIT - Large scale is the winning formula

Started in 2002 with just eight properties, A-REIT has successfully enlarged its property portfolio across five sub-sectors: Business & Science Parks, High-Tech industrial, Light Industrial, Logistics & Distribution and Warehouse Retail facilities. 47% of its portfolio has built-in rental escalation clauses. These properties enjoy above-sector average occupancy rate of 97.1%.

Acquisitions have underpinned A-REIT’s dividend growth. Its development capability provides an additional boost. Completion of development projects over the next 12 months will continue to contribute positively to income. Growth could also come from acquisitions of its sponsor’s Singapore assets (S$1.1b) and ample industrial properties in Singapore.

A-REIT has completed two rounds of cash calls this calendar year, raising a total of about S$700m. The proceeds have been deployed towards reducing debt and funding its existing developments. Its gearing has been reduced to 29.3% as of Aug-09. This clears any possible overhang on refinancing issues and frees up its capital for future growth.

REIT’s strong sponsor, balance sheet strength, resilient portfolio and growth potential underscore its P/B ratio of 1.05x. We find its share price underperformance hard to justify. We initiate with a Buy.